A volatile economic landscape has consumers thinking twice before making a purchase. When they do buy, they expect to get more for their money. Companies that disappoint see consumers taking to social media to air their complaints. The results can be damage to the brand, eroding market share, and the shaking up of jittery shareholders.
To navigate these waters, companies must be laser-focused on their customers. They must use customer analytics to gain insights into their customers' profitability and lifetime value, and monitor customer behavior across multiple channels and social media. They must take advantage of real-time and predictive analytics to make decisions that increase value for both company and customer.
Building this customer value focus helps companies find smarter ways to meet increasing customer expectations on a day-to-day basis, while at the same time protecting and growing their profit and revenue.
Most companies perform some kind of customer profitability analysis. It is important to include all relevant drivers in profitability models, such as cost-to-serve, so companies can gain an accurate view of the potential profitability and lifetime value by customer.
Customer profitability analysis usually reveals three categories of customers:
- Highly profitable: the top 20 percent of customers, who can generate 150 percent to 300 percent of total profits;
- Moderately profitable: the middle 70 percent of customers, who usually break even; and
- Unprofitable: the remaining 10 percent of customers, who lose 50 percent to 200 percent of the total profits.
Gaining a deeper understanding of profitability by customer allows companies to develop improvement plans and enhance relationships with their most valuable customers—and divorce unprofitable ones when and if it makes sense.
Companies must understand how their investments create perceived value for customers. The value proposition analysis often includes several components of total value creation, such as products, price, after-sales services, and customer experience. This level of understanding helps organizations optimize investments while improving total perceived value.
Finally, it is important to build sustainability. While companies can find ways to increase their customer base and even make a profit from customers in the short run, success in the long run requires building capabilities that can sustain and continuously grow the customer and profit base. Sustainability happens when a company's internal functions work across silos to focus on customers, continuously learning their needs, leading to greater innovation, relevancy, and loyalty.
To create a customer value focus, Ernst & Young recommends companies take the following approach.
1. Gain accurate and deep insights. Collect insights into customers' preferences (e.g., products, services, channels, pricing, promotions, terms), their real-time behaviors across multiple interaction channels and social media, and their profitability and potential lifetime value to the organization.
2. Define a customer value strategy and action plan. Leverage customer insights to create an action plan for each customer (or subsegment) to improve their profitability, lifetime value, and advocacy.
3. Match business delivery model and channel mix. The goal is to optimize cost-to-sell and cost-to-serve based on customers' profitability, lifetime value, and preferences.
4. Align operational processes. By aligning operational processes, companies can engage and delight customers at the most important touchpoints by providing what is truly valuable—speed, accuracy, responsiveness, seamless experience, ease of access, improved terms, and SLAs.
5. Review investment allocation processes. Companies will want to reassess whether their investment processes properly allocate investments to customer value improvement projects on an ongoing basis.
In an environment of prolonged stagnation in overall consumer demand and increasing customer expectations, improving customer value focus offers organizations an opportunity to achieve continuous, profitable growth.
Woody Driggs is a managing principal with Ernst & Young LLP in the firm's Advisory Services Performance Improvement practice.